Banks crying wolf over rates: report

Claims by the banks that they are under pressure not to pass on interest rate cuts because of rising funding costs have been knocked down by a new report, which says their concerns are being overstated.

Australian banks need to raise tens of billions of dollars every year so they have enough money to lend to customers, leaving them vulnerable to rising costs on global funding markets where conditions have de­teriorated as a result of Europe’s debt crisis.

After coming under intense political pressure,
Australia and New Zealand Banking Group
,
Commonwealth Bank of Australia
, National Australia Bank and
Westpac Banking Corporation
passed on the Reserve Bank of Australia’s interest rate cut to home loan customers last week. However, the major banks have signalled they may not hand down future official rate moves in full if their cost of funds remain elevated.

With the banks’ position on interest rates attracting major scrutiny, Deutsche Bank analyst James Freeman wrote in a report to clients that the “impact from rising wholesale funding costs has been overstated".

“There has been a great deal of focus on the issue of wholesale funding for the major Australian banks," Mr Freeman said. “Whilst we accept that the risk to earnings from funding costs has increased, we still believe the impact will not be significant enough to materially impede banks’ profitability."

Addressing shareholders at NAB’s annual general meeting yesterday, Mr Clyne said “it is costing us more to acquire the funds that we lend to people for their mortgages", while the group’s chairman,
Michael Chaney
, hit out at criticism of lenders, saying they were being used as a “political football".

Westpac chief
Gail Kelly
said on Wednesday banks needed “flexibility" on interest rates to account for higher funding costs. ANZ chief executive of Aus­tralia
Philip Chronican
said last week that the bank would move to set its home loan rates independently of the RBA in the future as “bank funding costs are now largely unrelated to movements in the . . . official cash rate".

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In the report, Deutsche ac­knowledged that the cost of accessing funds on global wholesale markets had risen markedly, forcing banks to pay as much as 1 percentage point more than they did six months ago.

However, the report said Australia’s banks could largely sidestep global markets by turning to other forms of cheaper funding, such as deposits from customers and domestic debt issuance. Costs in these markets remain “similarly priced" to six months ago, Deutsche found.

According to the report, the big four banks need to raise a combined $88 billion in the 2012 financial year.

NAB has the biggest funding requirement at $27 billion, while ANZ “is best positioned" because it has the smallest need at $17 billion, the report said.

Despite the enormity of the funding task, Deutsche estimated the big four banks would need to turn to international markets for just $12 billion, while the remainder could be raised through other channels.